It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Wipro Limited (NYSE:WIT).
Is Wipro Limited (NYSE:WIT) a cheap investment now? Hedge funds are becoming less confident. The number of bullish hedge fund positions retreated by 2 lately. Our calculations also showed that WIT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Ken Fisher of Fisher Asset Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to analyze the recent hedge fund action regarding Wipro Limited (NYSE:WIT).
How have hedgies been trading Wipro Limited (NYSE:WIT)?
Heading into the fourth quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from one quarter earlier. By comparison, 8 hedge funds held shares or bullish call options in WIT a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, AQR Capital Management was the largest shareholder of Wipro Limited (NYSE:WIT), with a stake worth $24.4 million reported as of the end of September. Trailing AQR Capital Management was Segantii Capital, which amassed a stake valued at $23.2 million. LMR Partners, Fisher Asset Management, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Segantii Capital allocated the biggest weight to Wipro Limited (NYSE:WIT), around 3.16% of its 13F portfolio. Sensato Capital Management is also relatively very bullish on the stock, designating 1.33 percent of its 13F equity portfolio to WIT.
Because Wipro Limited (NYSE:WIT) has experienced bearish sentiment from hedge fund managers, it’s safe to say that there is a sect of hedgies that elected to cut their positions entirely in the third quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the biggest investment of the 750 funds tracked by Insider Monkey, comprising an estimated $0.6 million in stock. Donald Sussman’s fund, Paloma Partners, also dropped its stock, about $0.5 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds in the third quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Wipro Limited (NYSE:WIT) but similarly valued. We will take a look at McCormick & Company, Incorporated (NYSE:MKC), The Kroger Co. (NYSE:KR), Weyerhaeuser Co. (NYSE:WY), and Synopsys, Inc. (NASDAQ:SNPS). This group of stocks’ market valuations are similar to WIT’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MKC | 27 | 138492 | -3 |
| KR | 25 | 632469 | -3 |
| WY | 28 | 451903 | 0 |
| SNPS | 40 | 1362195 | -2 |
| Average | 30 | 646265 | -2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $646 million. That figure was $111 million in WIT’s case. Synopsys, Inc. (NASDAQ:SNPS) is the most popular stock in this table. On the other hand The Kroger Co. (NYSE:KR) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks Wipro Limited (NYSE:WIT) is even less popular than KR. Hedge funds dodged a bullet by taking a bearish stance towards WIT. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately WIT wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); WIT investors were disappointed as the stock returned -0.5% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
